On Jan 29, we reaffirmed our Neutral recommendation on steelmaker Nucor Corporation (NUE). While weak pricing and challenging steel market fundamentals remain concerns, strength across automotive and energy markets coupled with the company’s key projects should support results moving ahead.
Why Neutral?
Nucor, on Jan 28, posted better-than-expected fourth-quarter 2013 results. Both revenues and adjusted earnings for the quarter beat Zacks Consensus Estimates. Profit climbed year over year on the back of higher shipments and a tax-related gain.
Moving ahead, earnings are expected to be flat sequentially in the first quarter of 2014. While Nucor anticipates that no major extended planned outages will take place at its steel mills and expects to incur lesser start-up costs at its Louisiana direct reduced iron (DRI) facility, it sees seasonally weaker performance in its fabricated construction products businesses.
Nucor, a Zacks Rank #3 (Hold) stock, is seeing strength across end markets such as heavy equipment, automotive, general manufacturing and energy. Demand across these end-markets is healthy, providing support to the company’s top line.
Moreover, Nucor is progressing well with its key projects that are expected to boost its earnings power over the long-term. The Louisiana DRI facility, its largest project, came online in Dec 2013. The $750 million plant is expected to produce 2.5 million tons of DRI annually when the operations are in full swing.
Nucor is also aggressively investing to secure a low-cost supply of natural gas on a long-term basis to cover its expected future steelmaking and DRI production needs. The company also has an impressive record of returning cash to shareholders.
However, the steel industry is still going through a difficult phase and market fundamentals remains challenging in the U.S. There is not enough demand for steel products due to persistent weakness in construction end markets, resulting in excess supply. Contributing toward this inventory glut are production ramp ups by domestic steel producers and rapid growth in Chinese production.
Nucor, like other steel makers, is plagued by surging domestic steel imports. Consumers in the U.S. are importing cheaper steel from China, forcing domestic steel producers to sell at lower prices. Despite the U.S. steel industry’s low capacity utilization, imports continues to flow into the domestic market due to foreign producers’ overcapacity.
Other Stocks to Consider
Other companies in the steel industry worth considering are Companhia Siderurgica Nacional (SID), ArcelorMittal (MT) and U.S. Steel Corp. (X). All of them carry a Zacks Rank #1 (Strong Buy).
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment